One of the most popular home improvement shows has been “Flip Or Flop,” featuring an Orange County couple who buy scruffy homes, remodel them, then resell them — usually but not always — for a profit. The couple, who eventually separated, developed a loyal following of viewers. But in the eyes of some California lawmakers, they are predatory speculators who must be stopped.
Naturally, there is legislation in Sacramento for this, Assembly Bill 1771, also known as the California Housing Speculation Act. It would impose a 25% levy on top of capital gains tax on homes sold within three years of the original purchase. The rate declines until there is no additional tax after seven years. Anyone who buys a property, improves it, and then makes a profit on its sale after a short term property would be hit by the tax.
“If someone tries to get in there, fix a repairman and then sell it for record profits, that distorts the market because someone else could have come in, done the same and kept the house. “, declares the member of the Assembly. Chris Ward, the San Diego Democrat who introduced the bill.
The legislation is based on the premise that “single home buyers are finding it increasingly difficult to secure a home because cash-rich investor-buyers have added additional demand for housing… houses”.
“Housing speculation is making it nearly impossible for California workers to buy a home,” Ward tweeted recently. “#AB1771 is about leveling the playing field so everyone can find a place to call home, not about rewarding investors looking to make a quick buck.”
Speculators have been stigmatized in our culture. They are often blamed for rising gas prices, stock market bubbles, even the cost of feeding a family, and despised for not baking bread, building cars, and providing no services. Tom Clark, President Harry Truman’s attorney general, complained in 1947 that speculators were “profiting from human misery.”
“If their detractors are to be believed,” said John Tamny, editor of RealClearMarkets, “they are a destabilizing force in the economy.”
It’s possible, however, that they aren’t the ruthless monsters we’re supposed to believe. According to Investopedia, speculators “simply provide liquidity to markets, assist in price discovery, and take risks that other market participants want to offload.” They also ensure that commodity markets are efficient “and avoid shortages of goods by offering them when prices fall and funding the intermediaries who link supply chains”.
In the housing market, speculators are often responsible for the upgrading of neighborhoods. According to economic researchers from CoreLogic, an Irvine-based data, analytics and business intelligence firm, pinball machines could “improve run-down or distressed segments of housing stock that may otherwise not be suitable for most home buyers.” ‘a first home’, and in doing so, in effect, ‘provide more supply to those buyers.’
Flipping also has benefits for the community. Returning previously vacant homes to tax rolls and increasing the value of nearby properties are positive effects, as are the employment of local contractors who turn seedy properties into attractive homes and the reduction in crime associated with unoccupied housing.
The resurgence of Old Town Pasadena along Colorado Boulevard is a story of the indispensability of speculators.
“Throughout the 1970s and much of the 1980s,” Tamny says, it was “a dangerous place,” belittled by “dive bars, seedy shops selling X-rated goods and pawnshops.” . But what was once “dilapidated, dirty and largely devoid of foot traffic is now teeming with buyers”, having been “revitalized thanks to land and business speculators who did not want to be intimidated by the present, and who rather saw potential than few others have, and the whole town now benefits from “their fearless nature.”
Speculators certainly take risks; but with that risk comes local economic progress. It “propels economies and motivates entrepreneurs to innovate,” says Allison Schrager, senior fellow at the Manhattan Institute. “For better or for worse,” risk “is at the heart of economic growth, and successfully allocating it — not avoiding it — is the key to prosperity.”
Speculation is also a source of “knowledge that no amount of market research could match,” says Tamny. Without it, “almost every business would be flying blind” and “the root of all economic activity” would wither.
Granted, not all Fins are like that awesome couple on the TV screen. But they’re not the ruthless sharks they’re made out to be, either.
Kerry Jackson is a Fellow of the Center for California Reform at the Pacific Research Institute.